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Private-company GAAP alternatives could unlock savings

The first two GAAP alternatives created by the Private Company
Council (PCC) were released by FASB on Thursday, giving private
companies new options for possible cost savings in their financial reporting.

FASB released Accounting Standards Updates describing the
alternatives. They are:

An exemption for private companies from the requirement to
annually perform impairment testing for goodwill subsequent to a
business combination.

A simplified hedge accounting approach for certain interest-rate
swaps that private companies other than financial institutions enter
to convert variable-rate debt to fixed-rate debt. Private companies
whose only derivatives are such swaps also will be relieved of
certain fair value disclosures.

“These two accounting standards address issues that
private-company stakeholders have told us are priorities,” said FASB
Chairman Russell Golden.

Savings could be substantial

Each GAAP alternative has the potential to bring significant cost
savings to private companies that can use them, experts say. Those who
adopt the goodwill alternative will have to test for impairment only
when a triggering event occurs that would indicate that the fair value
of an entity (or reporting unit) may be below its carrying amount.

The frequency of this trigger should be decreased because private
companies that choose the alternative would be required to amortize
the book value of goodwill over a period not to exceed 10 years, said
Brian Marshall, CPA, a partner in the National Accounting Standards
Group for McGladrey LLP.

Even when impairment testing is required, it should be simpler than
in the past, Marshall said. Private companies often have struggled to
comply with current guidance requiring testing at the reporting unit
level because it is difficult for them to identify their reporting
units. The alternative will give them the opportunity to test for
impairment at the entity level rather than the reporting unit level.

In cases where impairment is identified, it will be recorded simply
as the amount by which the book value of an entity (or reporting unit)
exceeds the fair value. This can be a cost savings because traditional
guidance in this situation calls for hypothetical business combination
accounting that can require identification and valuation of intangible
assets—and the services of a valuation specialist, Marshall said.

“There are certainly a number of things that would result in
companies having some cost savings if they adopted the alternatives,”
Marshall said.

New approach for swaps

The simplified hedge accounting approach also can create significant
cost savings, according to Faye Miller, CPA, a partner in the National
Professional Standards Group at McGladrey LLP.

Miller said it’s common for private companies to approach banks in
hopes of receiving a fixed-rate loan, only to be required to take out
a variable-rate loan with a separate interest-rate swap to receive the
fixed rate. Understanding and applying traditional hedge accounting to
these swaps can be difficult for private companies.

The alternative is designed to provide private companies a simpler
approach to apply hedge accounting to certain swaps. The exception
could be particularly advantageous for private companies that entered
into swaps in the past, but did not initially choose or properly
elect hedge accounting, Miller said, because the exception is allowed
for existing swaps as well as new swaps.

Private companies also can wait until their financial statements are
issued to have the documentation in place and elect to apply the
simplified hedge accounting approach, Miller said. But she advises
companies to expedite the election to avoid surprises.

“Even though the standard gives you a grace period to make the
election, it would be prudent to make sure upfront that you qualify
for the election and that it makes business sense for you to make the
election,” Miller said.

Evaluate before electing

Each alternative may be adopted for 2013 financial statements as
long as the private company hasn’t already made those financial
statements available for issuance, Marshall and Miller said. They
advised that before taking the alternatives, private companies should consider:

Users’ perspectives. Consulting with financial
statement users is a good idea, Marshall said. “For example, if you
have some lenders out there and you have some debt, you want to make
sure you’re discussing that with your bank and make sure that
they’re comfortable that you are electing this alternative,”
Marshall said.

If they plan to ever go public—or be acquired by a public
company. In either case, using GAAP alternatives for
private companies could create difficulties in the future. “If
you’re acquired by a public company, you’d have to put those
financial statements in a filing [in some cases],” Marshall said.
“And in those cases, you’d have to undo the election of the
alternative. So if that’s one of the company’s exit strategies,
that’s something they should also be considering.”

If the terms of the swap and the debt may change and get out
of sync. The prerequisites for taking the simplified
hedge accounting exception include having variable rates of the swap
and debt based on the same index, with the same reset frequencies.
“If there’s a chance that is not going to hold through for the term
of the swap, it may not be a good idea to elect this approach,”
Miller said.

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